Changing the Rules Concerning the Pre-Salt has Pros and Cons for Petrobras

The Senate approved an initiative that would eliminate Petrobras’ obligation to 30% of the extraction of petroleum from the pre-salt layer. This decision could have both positive and negative national consequences.

Wednesday night the Senate approved the end of Petrobras’s minimum requirement of 30% petroleum extraction in the pre-salt layer.

Though it still needs to be evaluated by the Congress and President Dilma Rousseff, the project would eliminate the state’s role as operator and central investor in the petroleum sector. This would allow foreign companies to bid for the right to extract.

Defenders of this controversial policy argue that it would not only open up the sector but also free up state funds. However, critics say that Petrobras will fail if it loses the right to the pre-salt layer and that pushing for such legislation during a downturn in the petroleum market would be risky.

Financial Relief

The project supporters believe the state company does not have the financial conditions to participate in all the acquisitions. This is a consequence of the company’s gross debt of more than $500 billion of reais, as well as the decline in investors associated with the political scandal of the Lava Jato.

Petrobras’ situation was very different in 2010, when the government approved the law for the 30% extraction. According to analysts, the new pre-salt auctions from the government were being delayed because of the financial restrictions in the state agency, which is still denied by the federal government. This requirement draws away potential international investors in the field.

“This regulatory change is progressive because it makes the return of investments in Petrobras feasible, which is not possible at the current financial situation” says Gilberto Braga, finance professor from Ibmec in Rio de Janeiro. “Without this mandatory participation, the government must accelerate its selective process of pre-salt compiled auctions, even with the barrel at $30.”

Greater Flexibility

The project would give the state greater flexibility. A suggestion by Senator Romero Jucá (PMDB-RR), in reference to the proposal created by José Serra (PSDB-SP), was that the National Council on Energy gives the state the option, in each region, of whether it wanted to maintain its right to 30% extraction.

This way, the state can decide on a case by case basis whether it wants the responsibility, thereby not obliging participation. Serra states that “Nobody is giving up anything. Nobody is exporting. Everything continues in the hands of the public, just that Petrobras has no legal commitments. Just this. And if it desires, say in one month, it can control it again.”

Risks to the National interest

Detractors affirm that the project favors the multinational companies and could potentially give away the country’s national riches to powerful oil companies. For them, the legislative change is regressive and, with a period of high volatility in the price of oil, not ideal.

Another argument is that the current division model was executed only once, at the megacamp auction in Libra in October 2013. It was the first pre-salt and the largest acquisition in Brazil’s history. The only partnership presented in the proposal was formed by Petrobras (40%), the Dutch-Angle Shell (20%), the French (20%) and by the Chinese CNPC (10%) and CNOOC (10%), who acquired the right to extract the area for 35 years.

“There is a great lobby mistake to increase foreign companies’ participation in Brazil. One of them is the compulsory 30% withdrawal,” says Ildo Sauer, energy professor in the University of Sao Paulo and visiting scholar of Duke University in the United States. “The great interest is due to the multinationals’ difficulty to find new beneficial resources of high quality in the world.”

He further explains that the largest part of the conventional oil is on the hands of the state oil companies such as in Venezuela, South Arabia, Iran and Iraq. Oil’s price will only increase and the country will have a surplus in the extraction and production areas. For this, it is necessary to control the production rhythm. “This proposal change in the current regime does not allow this. She goes against our national interest. “

Strategic Importance

Senator Vanessa Grazziotin (PCdoB-AM) defended the importance of the pre-salt layer in Petrobras’ revenues, as it composes 40% of production.

She emphasized that “There is only one objective: to place pressure on a government that is weak in order to create a bidding war, one in which the state cannot participate and others will pay a fraction of the cost. There is unprecedented pressure from multi-nationals for an auction.”

For Paulo Sotero, the director of the Brazil Institute at the Wilson Center in Washington, the national energy sector needs to be more stable and regulated “Or, that the legislation does not change when the price of oil changes.”